A Better Way For Trump To Respond To China

Richard A. D'Aveni
, ContributorI cover the strategic management of business and governmentOpinions expressed by Forbes Contributors are their own.

President Trump has more leverage over China than might appear. (AP Photo/Alex Brandon, File)

As a presidential candidate, Donald Trump denounced China for weakening its currency to steal business and jobs from Americans – “the greatest theft in the history of the world.” In office he’s been singing a different tune. First he declined to label the country a currency manipulator. And recently he told Chinese president Xi that he’d allow continued high trade deficits, in exchange for help in restraining North Korea’s nuclear ambitions.

Maybe President Trump is simply shifting his geopolitical focus from economics to the military. While the Chinese premier was visiting, he ordered the strike on the Syrian airfield and allowed the massive bomb in Afghanistan. Both were indirect messages that the United States is now prepared to act aggressively to defend its global interests. More directly, the administration sent a carrier group in February to patrol against Chinese expansionism in the South China Sea.

But there’s a better way for the government to confront China, and it plays directly into the economic nationalism that the president’s political base holds dear.

Producers and Consumers

A big reason for China’s astounding rise has been its policies favoring producers over consumers. By keeping wages low and showering companies with cheap capital, it has become a global manufacturing powerhouse. It relies on open borders in exporting to other countries, but at home it sets up a variety of restrictions against US and other foreign companies. Firms can sell, but they usually have to work with a local partner, and over time the profits – and intellectual property – usually disappear.

The U.S. tolerated these abuses up to now because of its pro-consumer tendencies. All those inexpensive Chinese goods made buyers happy, after all. And Chinese purchases of Treasury bonds helped fund the expanded American welfare state.

To meet the challenge from China, it’s time to reverse those policies. At least temporarily, we need to shift the balance back to producers. Some of that is already on track, with plans to boost spending on infrastructure and reduce corporate taxes. The new administration has also signaled its determination to fight “dumping” of low cost imports and other trade abuses. To get the most geopolitical bang for the buck, however, the Trump administration should target manufacturing.